Anybody seen my baby? Oh, I’m sorry, wrong column. I was hoping that someone would help me find the value of my dollar.
I suppose I should look south. Ever since the United States and other industrialized nations went off the gold standard decades ago, their currencies have been traded against each other in the open market, with the U.S. dollar as the de facto standard.
The United States is the world’s richest and most economically stable country, and that wealth is what gives people confidence in the dollar. Recently, that confidence has been eroding. The ballooning federal budget deficit is one factor, and another is the growing current-account deficit, which basically means that the United States is importing more goods than it is exporting.
Other factors in the dollar’s weakness are the low U.S. interest rates that have discouraged foreign investors from putting their money in U.S. markets and the fact that the Bush administration has been passive in supporting the dollar against other currencies.
When the dollar drops in value, it pushes down the return that foreign investors earn on U.S. Treasury bonds. To compensate for those lower returns, foreign investors might buy our Treasuries, only at higher yields. What’s more, by pushing up the cost of imports, a lower dollar could trigger inflation, which could hurt both the economy and stocks. But none of this is a certainty. The lower the dollar goes, the more attractive U.S. exports become, which could narrow the trade deficit and take some of the pressure off the buck.
Fortunately, though, this economic beast of burden is neither unbeatable nor universal. There are a couple of easy moves investors can make. The first is to put some of your money in foreign stocks or, better yet, mutual funds that invest in foreign stocks. There are a couple of potential payoffs here. You get additional diversification in your portfolio since foreign shares don’t always rise and fall in sync with U.S. stocks.
A falling dollar boosts the return of foreign securities owned by U.S. investors. The currency play also works with foreign bonds, but since bond returns are generally lower than those of stocks, a rebounding dollar can wipe out bond returns faster than would be the case with stocks. That’s why I’m more a fan of diversifying into foreign stocks than foreign bonds. International Equity Funds are certainly no guarantee of future success in the market. Time is on your side, however, and in the long run, International Equity Funds have performed comparably to domestic equities during their best periods.
If you feel as though you “can’t get no satisfaction” from either of the above options, a move you may want to consider is keeping a modest portion of your portfolio – five percent, just to start you up – in a mutual fund that tracks a commodity index or invests in ore companies, like mining firms and oil companies, which produce commodities. My pick in this category is the T. Rowe Price New Era Fund. Again, the theory here is that hard assets like commodities provide additional diversification for your portfolio and a hedge against inflation. One caveat – commodities have been hot goods the past couple of years with China’s roaring economy soaking up a huge portion of the world’s raw materials and driving up prices. If China falters or investors sour on commodities, the funds that have done so well in this area in recent years could take a hit, so exercise some caution.
I favor no-load International Equity Funds since they guarantee immediate diversification and are led by a strong manager or a core of managers who have one job – increase returns. Remember, you can’t always get what you want. But, if you try sometimes, you just might find you get what you need.
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